Thursday, June 24, 2010

Robert Stavins says climate change legislation is still possible and, after
an extensive review of all the "real options for climate policy in the United
States," he concludes that the best available alternative is an economy-wide
cap-and-trade system. (It's hard for me to envision an economy-wide
cap-and-trade system finding the political support it needs to be enacted, but I hope I'm wrong. This is quite a bit shorter than
the original and, in addition, the original is dense with links to supporting
documentation.):

The Real Options for U.S. Climate Policy, by Robert Stavins: The
time has not yet come to throw in the towel regarding the possible
enactment in 2010 of meaningful economy-wide climate change policy...
Meaningful action of some kind is still possible, or at least conceivable.
But with debates regarding national climate change policy becoming more
acrimonious in Washington as midterm elections approach, it is important to ask,
what are the real options for climate policy in the United States – not only in
2010, but in 2011 and beyond. That’s the purpose of this essay.

Federal Policy OptionsLet’s begin my
considering Federal policy options under two distinct categories: pricing
instruments and other approaches. Carbon-pricing instruments could take
the form of caps on the quantity of emissions (cap-and-trade, cap-and-dividend,
or baseline-and-credit), or approaches that directly put carbon prices in place
(carbon taxes or subsidies). Beyond pricing instruments, the other
approaches include regulation under the Clean Air Act, energy policies not
targeted exclusively at climate change, public nuisance litigation, and NIMBY
and other public interventions to block permits for new fossil-fuel related
investments. I will discuss each of these in turn. ...

A Quick Reminder about Cap-and-Trade In brief, there
are four principal merits of the cap-and-trade approach to achieving significant
reductions of carbon dioxide (CO2) emissions. First, this
approach achieves overall targets at minimum aggregate cost... Second, the
allowance allocation under a cap-and-trade system can be used to build a
constituency of political support across sectors and geographic areas
without driving up the cost of the program or reducing its environmental
performance. Third, we have significant experience in the United States
with the use of this approach, including during the 1980s to phase out leaded
gasoline from the marketplace, and since the 1990s to cut acid rain by 50
percent. Fourth, and of great importance, a domestic cap-and-trade system
can be linked directly and cost-effectively with cap-and-trade systems and
emission-reduction-credit systems in other parts of the world...

Three principal concerns have been voiced about cap-and-trade systems in U.S.
debates. First, while a cap-and-trade system constrains the quantity of
emissions, the costs of control are left uncertain (although such cost
uncertainty can be limited — if not eliminated — through the use of safety
valves, price collars, or related mechanisms). Second, in the wake of
concerns regarding the role that financial markets played in the global
recession, there have been many fears about the possibilities of market
manipulation in a cap-and-trade system. A third concern – in a political
context – is that this cost-effective approach to environmental protection,
pioneered by the Republican administration of President George H. W. Bush, has –
ironically — been demonized by conservatives in current debates. ...

A Populist Approach? Populism has emerged as
a major theme in recent electoral politics in the United States, both from the
left and from the right. What might be characterized as a populist
approach would be a cap-and-trade system with 100% of the allowances auctioned
and the auction revenue returned directly “to the people.” Although this
is a standard variant of cap-and-trade design, contemporary politics — with its
demonization of the phrase “cap-and-trade” — might well argue for a name change:
how about “cap-and-dividend?”...

The merits of this approach include its simplicity, appearance of fairness, and
related appeal to the populist mood. Concerns, however, include the
proposal’s relatively modest environmental achievements (according to an
analysis by the World Resources Institute), its overall cost due to restrictions
on trading, and its apparent political infeasibility, given its lack of visible
support in the Congress. ...

Direct Carbon Pricing A carbon tax system
would be similar in design to an upstream cap-and-trade approach. There is
some real interest in this approach, mainly from academics, and there is also
what I would characterize as “strategic interest,” principally from those who
recognize that once the focus is on carbon taxes rather than other instruments,
political debates will inevitably result in less ambitious targets or, in fact,
no policy at all. ...

In this regard, it is important to note that what has frequently been
interpreted as hostility to cap-and-trade in the U.S. Senate is actually – on
closer inspection — broader hostility to the very notion of carbon pricing (or
any climate change policy). Surely, the political reception to a carbon
tax would be even less enthusiastic than the reception that has greeted recent
cap-and-trade proposals. ...

Climate Change Regulation under the Clean Air Act
Regulations of various kinds may soon be forthcoming – and in some cases, will
definitely be forthcoming – as a result of the U.S. Supreme Court
decision in Massachusetts v. EPA and the Obama administration’s subsequent
“endangerment finding” that emissions of carbon dioxide and other greenhouse
gases endanger public health and welfare. This ... identified carbon
dioxide as a pollutant under the Clean Air Act...

However, regulatory action on carbon dioxide under the Clean Air Act will
accomplish relatively little and do so at relatively high
cost, compared with carbon pricing. ... Indeed it is reasonable to
ask whether this is a credible threat, or will instead turn out to be
counter-productive (when stories about the implementation of inflexible,
high-cost regulatory approaches lend ammunition to the staunchest opponents of
climate policy). ...

Does the Path to National Climate Policy Need to Go through
Washington? With political stalemate in Washington, attention may
increasingly turn to regional, state, and even local policies intended to
address climate change. The Regional Greenhouse Gas Initiative (RGGI) in
the Northeast has created a cap-and-trade system among electricity generators.
More striking, California’s Global Warming Solutions Act will likely lead to the
creation of a very ambitious set of climate initiatives, including a statewide
cap-and-trade system... The California system is likely to be linked with
systems in other states and Canadian provinces under the Western Climate
Initiative. ...

An important question is whether there can be sensible sub-national policies
even in the presence of an economy-wide Federal carbon-pricing regime? The
answer is surely yes, partly because other market failures will continue to
exist that are not addressed by carbon pricing. ...

In the meantime, in the absence of meaningful Federal action,
sub-national climate policies could well become the core of national action.
...

The Path Ahead Conventional politics clearly disfavors
market-based (pricing) environmental policy approaches that render costs obvious
or at least somewhat transparent, despite the fact that the costs of these same
policies are actually less than those of alternative approaches. Instead,
conventional politics favors approaches to environmental protection that render
costs less obvious (or better yet invisible), such as renewable portfolio
standards, and — for that matter — all sorts of command-and-control performance
and technology standards.

But carbon pricing will be necessary to address the diverse economy-wide sources
of CO2 emissions effectively and at sensible cost, whether the carbon
pricing comes about through an economy-wide Federal cap-and-trade system or
through a Federal carbon tax. It is inconceivable that truly meaningful
reductions in CO2 emissions could be achieved through purely
regulatory approaches, and it remains true that whatever would be achieved,
would be accomplished at excessively high cost.

So, although it is true – as I have sought to explain in this essay – that there
are a diverse set of options for future climate policy in the United States,
the best available alternative to an economy-wide cap-and-trade system enacted
in 2010 may be an economy-wide cap-and-trade system enacted in 2011!

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"The Real Options for U.S. Climate Policy"

Robert Stavins says climate change legislation is still possible and, after
an extensive review of all the "real options for climate policy in the United
States," he concludes that the best available alternative is an economy-wide
cap-and-trade system. (It's hard for me to envision an economy-wide
cap-and-trade system finding the political support it needs to be enacted, but I hope I'm wrong. This is quite a bit shorter than
the original and, in addition, the original is dense with links to supporting
documentation.):

The Real Options for U.S. Climate Policy, by Robert Stavins: The
time has not yet come to throw in the towel regarding the possible
enactment in 2010 of meaningful economy-wide climate change policy...
Meaningful action of some kind is still possible, or at least conceivable.
But with debates regarding national climate change policy becoming more
acrimonious in Washington as midterm elections approach, it is important to ask,
what are the real options for climate policy in the United States – not only in
2010, but in 2011 and beyond. That’s the purpose of this essay.

Federal Policy OptionsLet’s begin my
considering Federal policy options under two distinct categories: pricing
instruments and other approaches. Carbon-pricing instruments could take
the form of caps on the quantity of emissions (cap-and-trade, cap-and-dividend,
or baseline-and-credit), or approaches that directly put carbon prices in place
(carbon taxes or subsidies). Beyond pricing instruments, the other
approaches include regulation under the Clean Air Act, energy policies not
targeted exclusively at climate change, public nuisance litigation, and NIMBY
and other public interventions to block permits for new fossil-fuel related
investments. I will discuss each of these in turn. ...

A Quick Reminder about Cap-and-Trade In brief, there
are four principal merits of the cap-and-trade approach to achieving significant
reductions of carbon dioxide (CO2) emissions. First, this
approach achieves overall targets at minimum aggregate cost... Second, the
allowance allocation under a cap-and-trade system can be used to build a
constituency of political support across sectors and geographic areas
without driving up the cost of the program or reducing its environmental
performance. Third, we have significant experience in the United States
with the use of this approach, including during the 1980s to phase out leaded
gasoline from the marketplace, and since the 1990s to cut acid rain by 50
percent. Fourth, and of great importance, a domestic cap-and-trade system
can be linked directly and cost-effectively with cap-and-trade systems and
emission-reduction-credit systems in other parts of the world...

Three principal concerns have been voiced about cap-and-trade systems in U.S.
debates. First, while a cap-and-trade system constrains the quantity of
emissions, the costs of control are left uncertain (although such cost
uncertainty can be limited — if not eliminated — through the use of safety
valves, price collars, or related mechanisms). Second, in the wake of
concerns regarding the role that financial markets played in the global
recession, there have been many fears about the possibilities of market
manipulation in a cap-and-trade system. A third concern – in a political
context – is that this cost-effective approach to environmental protection,
pioneered by the Republican administration of President George H. W. Bush, has –
ironically — been demonized by conservatives in current debates. ...

A Populist Approach? Populism has emerged as
a major theme in recent electoral politics in the United States, both from the
left and from the right. What might be characterized as a populist
approach would be a cap-and-trade system with 100% of the allowances auctioned
and the auction revenue returned directly “to the people.” Although this
is a standard variant of cap-and-trade design, contemporary politics — with its
demonization of the phrase “cap-and-trade” — might well argue for a name change:
how about “cap-and-dividend?”...

The merits of this approach include its simplicity, appearance of fairness, and
related appeal to the populist mood. Concerns, however, include the
proposal’s relatively modest environmental achievements (according to an
analysis by the World Resources Institute), its overall cost due to restrictions
on trading, and its apparent political infeasibility, given its lack of visible
support in the Congress. ...

Direct Carbon Pricing A carbon tax system
would be similar in design to an upstream cap-and-trade approach. There is
some real interest in this approach, mainly from academics, and there is also
what I would characterize as “strategic interest,” principally from those who
recognize that once the focus is on carbon taxes rather than other instruments,
political debates will inevitably result in less ambitious targets or, in fact,
no policy at all. ...

In this regard, it is important to note that what has frequently been
interpreted as hostility to cap-and-trade in the U.S. Senate is actually – on
closer inspection — broader hostility to the very notion of carbon pricing (or
any climate change policy). Surely, the political reception to a carbon
tax would be even less enthusiastic than the reception that has greeted recent
cap-and-trade proposals. ...

Climate Change Regulation under the Clean Air Act
Regulations of various kinds may soon be forthcoming – and in some cases, will
definitely be forthcoming – as a result of the U.S. Supreme Court
decision in Massachusetts v. EPA and the Obama administration’s subsequent
“endangerment finding” that emissions of carbon dioxide and other greenhouse
gases endanger public health and welfare. This ... identified carbon
dioxide as a pollutant under the Clean Air Act...

However, regulatory action on carbon dioxide under the Clean Air Act will
accomplish relatively little and do so at relatively high
cost, compared with carbon pricing. ... Indeed it is reasonable to
ask whether this is a credible threat, or will instead turn out to be
counter-productive (when stories about the implementation of inflexible,
high-cost regulatory approaches lend ammunition to the staunchest opponents of
climate policy). ...

Does the Path to National Climate Policy Need to Go through
Washington? With political stalemate in Washington, attention may
increasingly turn to regional, state, and even local policies intended to
address climate change. The Regional Greenhouse Gas Initiative (RGGI) in
the Northeast has created a cap-and-trade system among electricity generators.
More striking, California’s Global Warming Solutions Act will likely lead to the
creation of a very ambitious set of climate initiatives, including a statewide
cap-and-trade system... The California system is likely to be linked with
systems in other states and Canadian provinces under the Western Climate
Initiative. ...

An important question is whether there can be sensible sub-national policies
even in the presence of an economy-wide Federal carbon-pricing regime? The
answer is surely yes, partly because other market failures will continue to
exist that are not addressed by carbon pricing. ...

In the meantime, in the absence of meaningful Federal action,
sub-national climate policies could well become the core of national action.
...

The Path Ahead Conventional politics clearly disfavors
market-based (pricing) environmental policy approaches that render costs obvious
or at least somewhat transparent, despite the fact that the costs of these same
policies are actually less than those of alternative approaches. Instead,
conventional politics favors approaches to environmental protection that render
costs less obvious (or better yet invisible), such as renewable portfolio
standards, and — for that matter — all sorts of command-and-control performance
and technology standards.

But carbon pricing will be necessary to address the diverse economy-wide sources
of CO2 emissions effectively and at sensible cost, whether the carbon
pricing comes about through an economy-wide Federal cap-and-trade system or
through a Federal carbon tax. It is inconceivable that truly meaningful
reductions in CO2 emissions could be achieved through purely
regulatory approaches, and it remains true that whatever would be achieved,
would be accomplished at excessively high cost.

So, although it is true – as I have sought to explain in this essay – that there
are a diverse set of options for future climate policy in the United States,
the best available alternative to an economy-wide cap-and-trade system enacted
in 2010 may be an economy-wide cap-and-trade system enacted in 2011!